Insurance PDF

INSURANCE THE NATURE OF THE CONTRACT Contract where 1 party (insurer) undertakes, in return for payment of a premium by the other (insured), to pay the insured sum of money (or equivalent) on the happening of a specified uncertain event in which the insured has an interest Types of Insurance...

INSURANCE THE NATURE OF THE CONTRACT Contract where 1 party (insurer) undertakes, in return for payment of a premium by the other (insured), to pay the insured sum of money (or equivalent) on the happening of a specified uncertain event in which the insured has an interest Types of Insurance Contracts of insurance may be classified according to: o Nature of peril insured against (E.g. fire) o Nature of interest affected by the peril (E.g. person, property, or financial reserves) o Nature of extent of the cover provided (indemnity, non-indemnity, valued) Better-known policies: o All risk policy (Covers property from any cause of damage, loss or destruction not specifically excluded) o Comprehensive motor vehicle policy (Covers motor vehicle and liability of insured for damage to property of 3rd party) o Fidelity policy (loss of money and stock-in-trade occasioned by dishonesty of employee) o Public liability policy (liability incurred by insured to members of the public) o Life policy ( payment of a sum of money on death of a person to his estate or 3rd party) STATUTORY REGULATION Long term and short-term acts: o Long term Insurance Act, Short term Insurance Act and the Regulations promulgated under this act control the insurance industry and aspects of insurance policies with the view to protecting interests of policyholders o Provisions for: ▪ Registrations of insurers ▪ Copies of policies to policyholders ▪ Invalidation of certain undesirable provisions in policies o LT insurance policy: Life policy, disability policy, health policy o ST policy: engineering policy, guarantee policy, liability policy, miscellaneous policy, motor policy, accident and health policy, property policy, transportation policy Policyholder protection rights:  o Protection rules for LT and ST insurance (separate for each LT and ST) o Objective: Ensure that policies are entered into, executed and enforced in accordance with sound insurance principles and practice in the interests of the parties and in the public interest o Basic rules for direct marketers (Manner in which insurers must conduct business and dealings with general public) FORMATION OF THE CONTRACT Parties: o Usually 2 parties (insurer and insured) o 3rd party nominated as beneficiary of policy – contract is a stipulation alteri o If 3rd person accepts benefit of policy – May bring about a second contract between 3rd party and insurer o Policyholder – person entitled to be provided with the benefits of a policy Formalities: o Common law – No formalities required o May be reduced to writing Submission of the proposal form and issue of the policy: o Party wanting to take out insurance – Completes and submits proposal form to insurer o Submission of form = Offer to take out insurance on terms fixed by insurer for that type of insurance o Proposer = Offeror and insurer = offeree o Proposal form provides info to insurer that it needs to decide whether/not to undertake insurance o Details on form: ▪ Personal particulars ▪ Details of subject matter of insurance and possible hazards ▪ Proposer’s insurance history and financial status ▪ Amount of insurance required (Life and health insurance) ad medical history o Form contains factual statements (insurer bases decisions) o Statements become material terms of the contract (insurer may avoid liability if false) o Insurer may not require proposer to sign a blank or partially completed proposal form where another person will have to fill in other required details o If insurer accepts proposal – Issues insurance policy to insured (sets out terms of insurance) o Issue of policy – Acceptance of insured’s offer  Invalid terms: o Insurer exempt from liability for actions of person acting on its behalf in relation to the policy o Insured declares/admits that a person who acted on behalf of the insurer in connection with the offer to conclude the policy or negotiations was appointed to act on behalf of insured o Liability of insurer dependent upon discharging of an obligations of another person under ST reinsurance policy o Insured waives a right to which he is entitled ito the Act o Invalid terms only in ST policy: ▪ Insured may be compelled to undergo polygraph or lie detector in connection with claim ▪ Policyholder agrees to undergo such test and fails it, his claim will be rejected and become void ▪ Term that provides an inducement to a policyholder to submit to such a test or procedure ▪ Dispute under policy may only be resolved by means of arbitration Notification Requirements LT insurance: o Insurer must provide insured with written summary of policy o Within a reasonable time, insurer must also, in writing: ▪ Inform policyholder of the issue of the policy ▪ Provide policyholder with details of any available internal complaint resolution systems and procedures ST insurance: o Insurer must give policyholder who is a natural person, within 30 days after entering into or varying the policy, a copy of the document which embodies the policy o ST insurer may issue a policy to a policyholder only if: ▪ Provisions of policy are recorded in an easily readable manner ▪ Wording of every provision of the policy has a reasonable precise ascertainable meaning o Insurer must, within a reasonable period, in writing: ▪ Inform the policyholder of issue of the policy ▪ Provide policyholder with details of any available internal complaint resolution systems and procedures Role of the Broker Insured employs an insurance broker to act on his behalf  Broker acts as an intermediary between insurer and insured Broker is independent (i.e. not contractually bound to any particular insurer) Relationship between insured and broker: o Contract is one of mandate and requires broker to exercise reasonable care and skill in executing his duties o Level of care and skill expected – That attained by members of the branch of the profession to which he belongs (Same rank, status, degree of expertise) Duties of broker to insured: o Must receive instructions regarding and determine the nature of the perils that proposed insured wants to insure against and extent of premiums willing to pay o Ensure insured obtains the insurance cover required ▪ Elicit from insured and convey to him all material info relating to the insurance ▪ Info to be elicited and passed on to insurer – Any facts which may affect insurer’s assessment of risks/premiums ▪ Info to be conveyed – Info about exempting provisions in proposed policy which may leave insured w/o cover if not observed Lapperman Diamond Cutting Works V MIB Group: o Attempt to obtain required insurance on best terms available and with reasonable speed o Must deliver to insured any copy/summary of policy received on his behalf o Must inform insured (if applicable) that insurance is no longer in force due to termination or cancellation by insurer Broker doesn’t need to ensure insured complies with terms of policy o Lapperman Diamond Cutting Works C MIB Group: ▪ L engaged M to arrange a diamond insurance policy for it ▪ L subsequently made a claim under the policy – Insurer wasn’t held liable because L had not kept detailed records of its sales, purchases and others as required by policy ▪ L sued M for damages – Alleging it had breached its duties ▪ Court held – M was under no duty to keep detailed records for L as it is the insured’s responsibility to ensure compliance Broker may undertake additional duties pertaining to insured’s policies Relationship between insurer and broker: o Broker entitled to commission from insurer at a statutory rate o Payable only if contract of insurance is concluded with insured and insured pays premium  o ST insurer may in writing authorise a broker to receive and deal with premiums on its behalf (broker has furnished security in prescribed form) Statutory controls of broker: o Regulated by Financial Advisory and Intermediary Services Act o Person may not act as FSP unless he’s been issued with a license o Before issuing a license, FSPs must be satisfied that applicant complies with prescribed fit and proper requirements relating to honesty and integrity, competence and operational ability to fulfil the responsibilities imposed by the Act and financial soundness Interim Cover Insurer may agree to temporary insurance (interim cover) while considering a proposal Separate insurance contract Limited period Protect the insured during the interval that elapses No formalities (may be concluded orally or by conduct and insurer may issue cover notes) Canvassing agent (insurance representative) has no authority to grant interim cover o If in possession of cover notes – May held to have ostensible authority to agree to interim cover o No implied authority If not expressed to be for a defined period – Continues until insurer accepts/rejects insured’s proposal Where period is defined and insurer accepts proposal before expiry of period – interim insurance terminates as a result of novation o If rejected prior to expiry – only lapses if terms expressed provide so otherwise it remains in force until expiry of period It is implied that the terms of the interim insurance are those usually contained in insurer’s policies relating to type of risk in question ELEMENTS Payment of Premium Must be agreement to pay a premium Consideration in return for which insurer undertakes its obligation to compensate the insured If 3rd party assumes liability for payment of premiums – Doesn’t make 3rd party the policyholder  Lump sum or instalments in advance or in arrears If annual premium payable – Insure may permit insured to pay in 12 monthly instalments If insured under ST policy pays by debit order: o Ensure that debit order is drafted in favour of insurer o Once debit order operational, insurer may not unilaterally terminate it w/o giving policyholder 30 days’ notice in writing For insured to be entitled to compel payment by insurer, insured must either pay or tender payment of the premium (reciprocal obligations) Insure may adopt a policy ensuring that insured pays premium before insurer assumes risk, which may be done in 2 ways by the insurer: o Refuse to issue the policy until it has received the premium o May include a provision in the policy issued Promise by the Insurer to pay a Sum of Money or Render its Equivalent Contract must provide for this if the risk materialises Indemnity insurance: o Insurer promises to compensate insured for actual loss which he has suffered as a result of an event insured against o Insurer undertakes to pay insured a sum of money equal to the amount of his loss or render him an equivalent to monetary compensation (repair/replace) Non-indemnity insurance: o Insurer bound to pay a specified sum of money (or make periodic payments of specified amounts) to the insured on the happening of an event o No limit to the amount one can insure against one’s life/health/body o No restrictions on number of policies one may take out to protect such interests Valued policy: o Value of the thing insured is pre-agreed with insurer and insurer undertakes to pay out: ▪ Agreed value if thing is destroyed as result of stipulated event; or ▪ Proportion of the agreed value if the thing is damaged due to stipulated event o Falls between indemnity and non-indemnity ▪ Allows insured to recover more than actually lost where thing is over valued ▪ Insured must establish that he has suffered some loss On Materialisation of the Risk Meaning of risk: o Primary objective: Transference of risk from insured to insurer o Possibility of harm occurring as a result of an event (peril) taking place o Event must be: ▪ In the future ▪ Uncertain Description of risk: o Must be adequately described for insurer o Identify and describe the following: ▪ Object of the risk (E.g. the vehicle) ▪ Perils (potential loss causing events) to which insurance relates (natural/technical/human perils) ▪ Circumstances limiting the risk which are dealt with in 2 ways: Describing the risk in a way that limits its ambit (qualified promise) ‘ Introducing1/more exceptions that absolves the insurer from liability in particular circumstances (promise with exceptions) ▪ Any limitations on the extent of the insurer’s liability o Onus of proof: ▪ Insurer made a qualified promise – Onus is on insured to prove his claim falls within the ambit of the promise ▪ Insurer made a promise with exceptions – Onus is on insurer to prove that 1 of the exceptions apply Insurable Interest For contract to be enforceable – Insured must have an insurable interest Interest preventing the risk insured against from materialising For indemnity insurance – Interest must exist when risk materialises o If insured loses insurable interest prior – Policy becomes void and insured cannot recover o Commercial Assurance V Kern: ▪ K insured car and subsequently gave car to son ▪ Court held – K lost insurable interest in car and this caused policy to lapse (not entitled to recover) o Test of an insurable interest is whether the insured will incur a pecuniary loss or fail to derive an anticipated financial benefit if risk materialises  o Test satisfied if insured owns the subject matter of insurance or bears the risk of loss or simply by reason of factual circumstances in which the insured finds himself, he stands to loses financially if the event materialises For non-indemnity insurance – Interest must exist when the contract is concluded o Test of insurable interest – Proposed insured has a justifiable interest in the life, health or bodily integrity of person concerned o Accepted that: ▪ Person has insurable interest in his own life, health and body and his spouse ▪ Parents of an unborn child have an insurable interest in the birth of the child ▪ Person has an insurable interest in the life of a person against whom he has a right of support ▪ Creditor has an interest in life of debtor, a company in the life of its MD, a partner in the life of another partner and employee in life of employer Insured has insurable interest – Right of recovery is limited to the nature and extent of that interest o Can’t recover compensation if insured hasn’t suffered loss or loss sustained doesn’t fall within terms of the policy THE DUTY TO DISCLOSE MATERIAL FACTS The Basis of the Duty The facts and circumstances which that affect the risk invariably lie within the exclusive knowledge of the proposed insured Insurer is entirely dependent on insured for disclosure of info that will enable it to make a proper assessment of the risk to be insured against Therefore, proposer has a duty to disclose to insurer all material info of which proposer has actual/constructive knowledge Imposed by operation of law in all insurance contracts Breach – Amounts to mala fides (Entitles insurer to avoid liability under the contract) Ambit of the Duty Material facts to be disclosed: o Test of materiality - Undisclosed info is reasonably relative to the risk or assessment of premiums and considering the opinion of a reasonable  person, the info could affect the insurer’s decision whether to accept the risk or charge a higher premium o Examples of material facts: ▪ Facts that indicate that subject matter of the insurance is exposed to more than the ordinary degree of danger ▪ Facts suggesting that the insured is likely to cause risk to materialise through his own culpable conduct (includes moral hazards) ▪ Facts which show that the insurer’s right of subrogation would be worthless or of limited value ▪ Facts which show that the insured has financial problems or a poor financial history and as a result may not pay his premiums ▪ Facts which show that insured has poor insurance record o Insurer attempts to elicit info regarding to extent and nature of risk by way of questions in proposal form ▪ Insured’s duty of disclosure isn’t limited to answering questions in proposal form Info that doesn’t need to be disclosed: o Proposed insured doesn’t need to disclose: ▪ Facts that don’t affect the risk ▪ Facts that are general public knowledge ▪ Facts which insurer already knows or ought to know ▪ Facts which insurer has expressly/tacitly waived the right to be informed Express waiver – Specifically states that insured need not provide info Tacit waiver – manner or form which insurer poses gives reasonable impression that insurer doesn’t regard info material Actual/constructive knowledge: o Duty to make disclosure only to facts that insured has actual/constructive knowledge o Actual knowledge – Personal knowledge ▪ Company itself cannot have actual knowledge ▪ Company will have actual knowledge if the directors and managers who represent the directing mind and will of the body and control what it does have actual knowledge ▪ Knowledge of subordinate employee – Not knowledge of company o Constructive knowledge (imputed/presumed knowledge) – knowledge deemed in law to have existed w/o proof as a fact ▪ Constructive knowledge of a fact is imputed to an insured: Ought (in ordinary course of business) to have known of the fact  He would have ascertained the fact had he made such inquiries as reasonable business prudence required him to make If his employee acquired actual knowledge of the fact in the course of employment and was under duty to communicate knowledge to insured Time of Disclosure Duty of disclosure arises when person first takes out insurance and continues until acceptance of the proposal by the insurer Disclosure must be made on each renewal of the contract Renewal – New contract concluded Therefore, if material fact created after original issue of policy, must be disclosed at renewal stage Disclosure to the Insurer’s Agent Effective and deemed to have been made to insurer himself only if agent had authority to receive info from insurer ‘Agent to know’ Newsholme Bros V Road Transport and General Insurance: o Insured dictated answers in proposal form to insurer’s agent who filled them incorrectly o Insured signed formed w/o checking answers o Held that agent had not had authority from insurer to settle the proposal by completing the proposal form and as such had been acting as an agent of the insured o Thus, info he had received in that capacity couldn’t be imputed to the insurer Proposed insured entitled to expect that agent will transmit the material info correctly to insurer Insured not responsible if agent misstates facts or omits to mention some of them Insurance broker is agent of the proposed and obliged to pass on material info to insurer Insurer’s Right of Rescission Effect of non-disclosure of material fact – Renders contract voidable at option of insurer after it has had notice of non-disclosure Insurer has onus of proving that undisclosed info was: o Material  o Within knowledge (actual/constructive) of proposed insured o Not communicated to insurer/agent o Electing to rescind contract – Insurer obliged to restore what it has received under contract by way of premiums if insurer indicates by way of his conduct that he intends to abide by contract – Loses right of rescission EFFECT OF THE CONTRACT DURATION AND RENEWAL Duration Endures for period expressly/tacitly agreed upon May be a fixed/indefinite period Indemnity insurance – Fixed period o At end of period – contract expires and can be renewed Non-indemnity insurance – Normally indefinite period Renewal No obligation on insurer to arrange or agree to a renewal of policy If insurer send insured a renewal notice – Amounts to an offer to renew and payment of the renewal premium, tacit acceptance of that offer Renewal subject to condition that doesn’t get fulfilled – No renewal even if insurer accepts payment of premium Policy made provide for a period of grace – after expire of policy within which payment of the premium will secure renewal retrospectively Cooling off Period Applicable to LT Policy Protection rules for LT policies give policyholder a cooling off period Entitled to cancel policy and obtain refund of any premiums paid (subject to a deduction of any risk cover actually enjoyed and any market loss) If not benefit has been paid/claimed under policy and event insured against hasn’t occurred, policyholder may within 30 days of receipt of summary of the policy or from a reasonable date, cancel the policy by written cancelation notice sent to insurer Policyholder may prove that he completed cancellation notice in good faith and attempted to communicate it to insurer WARRANTIES Affirmative and Promissory Warranties Warranties encountered in contracts of insurance Affirmative warranty – E.g. Insured must be in possession of a valid driver’s license Promissory warranty – insured undertakes to conduct himself in some way or guarantees that certain things will or will not be done during the period of insurance Proposal form converts each factual question and answer into an affirmative warranty and a material term Statutory Protection of the Insured Common law – O/S characteristics of any insurance warranty is that if it is not exactly complied with in every respect, the insurer is entitled to cancel the policy Protect insured against repudiation based on inconsequential inaccuracies in insurance proposals Onus on insurer to prove why policy should be invalidated or liability excluded o Insurer discharges onus by proving that representation satisfies stipulated test Materiality affected means significantly affected o Reasonable person would have considered the insurer (had it known the facts) might either not have issued the policy or insisted on different terms DUTY OF INSURER TO COMPENSATE INSURED Circumstances under which Insurer is Liable to Pay Insurer liable to pay only if: o Risk described in policy has materialised o Liability of insurer isn’t excluded by virtue of exception o Any claim formalities imposed as a condition have been observed Materialisation of risk o Only if peril covered by policy was proximate cause of the harm for which insured is claiming compensation o Proximate cause – Dominant, effective or operative cause o Insurer not liable if harm brought about by insured’s own intentional conduct (policy may provide otherwise) Liability not excluded by an exception: o Policy may provide limited cover or general cover subject to exceptions  o Limited cover – Insured must bring claim within the terms of the policy o General cover with exceptions – Insurer bears onus of proving that exception Is applicable Any claim requirements complied with: o Insurer not liable if insured fails to comply with certain notice or claim requirements (provision in contract) o Intention of provision – Give insurer opportunity to test validity of a claim and take steps to mitigate loss o Provision interpreted as a condition (suspensive/resolutive) which render’s the insurer’s duty to pay conditional upon insured giving required notice o Time bar clause – If insurer repudiates insured’s claim, insured must institute legal proceedings to enforce claim within specified period or forfeit any benefit under the policy Extent of Insurer’s Liability Non-indemnity insurance: o Insurer bound to pay amount stipulated in contract o Insured doesn’t need to provide any proof he has suffered pecuniary loss (only has to show that the peril insured against has materialised) Indemnity insurance: o Insurer liable to pay amount that represents the actual commercial value of what he has lost as a result of the happening of the event insured against o Total loss – Insurer acquires a right of salvage in whatever remains of the item o Duty of insurer to indemnify the insured is qualified in several respects: ▪ Liability for an excess Excess clause – Obliges insured to bar first portion of any loss up to specified amount ▪ Under insurance Average clause Property is under insured i.e. insured for less than its true value insurer bound to pay only that proportion of the amount of the loss which the sum insured bears to the actual value of the property insured insurer’s liability = ▪ Double insurance: Taking out more than 1 indemnity policy to cover a particular risk (unless prohibited by an earlier policy)  Insured not obliged to disclose existence of any other policies unless specifically asked for this info If insured has more than 1 policy covering loss and combined sums insured exceed the amount required to indemnity him, he is not entitled to recover more than he has loss Insured may elect to recover full loss from only one insurer (insurer may recover pro rata contribution from other insurer’s) If insured makes claim against all insurers – Each is liable for their pro rata amount of loss Insured can’t recover in full from particular insurer if policy contains a contribution clause ▪ Reinstatement: Insurer has option of reinstating property insured (rebuilding/repairing/replacing) rather than paying sum of money for his loss Clause is for benefit of insurer Insured cannot insist on reinstatement If reinstatement impossible – Option falls away Insurer must make election within stipulated time period and notify insured Insured under implied duty not to prevent or obstruct insurer in exercising rights of reinstatements Elected to reinstate – Insurer must complete work If reinstated property less valuable than original – Insured may require insurer to make good the deficiency by way of damages Valued policy: o Total loss – Insurer must pay out pre-agreed value of the property (even if it exceeds actual value of property) o Loss only partial – Measure of insurer’s liability is proportion of agreed value which the actual diminution in value caused by the peril bears to the actual value of the object insured Dishonesty in Claims Process If insured makes untrue statement or conceals/omits to disclose material info, or impedes insurer in the exercising of its rights, the insured will forfeit all benefits ito the policy No common law rule to the effect that if fraudulent claim made the insurer is absolved from liability  o If absence of provision relating to fraudulent claim – insurer not entitled to repudiate fraudulent claim even if material o Schoeman V Constantia Insurance: ▪ S instituted action for indemnification under insurance policy for loss due to burglary ▪ Insurer argues that S forfeited claim – Fraudulently exaggerated loss ▪ No express term in insurance contract ▪ Court rejected argument Provision relating to fraudulent claims only operates if dishonest act Is material o Strydom V Certain Underwriting Members: ▪ S claimed indemnification under insurance policy for collision of his vehicle ▪ Provision in contract stating that benefit forfeited if claim were fraudulent ▪ Insurer repudiated liability – S made false statement knowingly as to cause of collision ▪ Court held – S’s dishonesty couldn’t have adversely affected insurer’s position in any way Negligence is assessing loss doesn’t entitle insurer to treat claim as dishonest or fraudulent The Rejection of Claims If insurer rejects claim or disputes it, must notify insured in writing of its reasons Policyholder may within period of not less than 90 days after date of relevant decision, make representations to the insurer i.r.o its decisions THE DUTY OF INSURED TO PAY THE PREMIUM Must pay on date agreed upon Fixed term contract – Normally date of commencement of term Indefinite – Divided into periods and premiums are payable at beginning or end of each period Annual premium – monthly instalments on fixed dates during year SUBROGATION Nature of Subrogation Right of an insurer which has indemnified an insured for loss to exercise all remedies of the insured against any 3rd party legally responsible for the loss  Entitled to benefit of compensation payable by 3rd party who’s legally liable for loss Doctrine of subrogation Based on: o Wrongdoer shouldn’t benefit from fact that insured was insured o Insured shouldn’t be enriched at expense of insurer by receiving insurance indemnity and damages from wrongdoer Acquired as a legal consequence of having indemnified insured No cession or transfer of right required Implied legal consequence of insurance contract Requirements Applies only once insurer has compensated insured for loss (may agree otherwise) Consequences Insurer entitled to bring action in the insured’s name (insured not responsible for legal costs) Insurer may sue in its own name if allowed by court Insured obliged to assist insurer with its action if necessary Insured under duty not to prejudice insurer’s right of recovery Insured must account to insurer if he receives compensation for his loss from 3rd party Insurer’s right of recovery is limited to amount is has paid insured 3rd party may raise any defence which would be available to him against the insured 3rd party may treat insurer as real plaintiff UNILATERAL TERMINATION BY INSURER Insurer may unilaterally terminate ST policy if it has given notice of cancellation direct to policy holder 30 days prior to cancellation date If direct notice not possible, insurer may cancel only if: o Publishes notice of cancellation in 2 editions of a newspaper circulating in all areas which policyholders reside o Forwards copy of notice to registrar prior to publication